Rs 114-bn PNB fraud adds to Rupee's woes as banks may tighten trade credit

The $2 billion fraud unearthed at Indian lender is casting its shadow over the rupee, already the second-worst performer in Asia this month, as banks tighten the availability of trade finance.

There’s concern that banks won’t roll-over existing trade credit as they increase scrutiny of short-term borrowing facilities linked to imports or exports in the wake of the fraudulent transactions at Punjab National Bank. Fewer rollovers have hurt the rupee in the past two weeks, Credit Suisse analysts including Neelkanth Mishra wrote in a note Friday.

The scam involved jeweler Nirav Modi, in connivance with rogue bank employees, using fake PNB guarantees worth about $2 billion to obtain loans from the overseas branches of Indian banks, according to documents made public or seen by Bloomberg.

“Unlike in the run-up to the mid-2013 crisis, short-term credit has not built up, but if roll-over challenges persist there could be some pressure on the rupee and domestic liquidity,” the analysts wrote.

The rupee is set for its worst week since September as traders cite enhanced demand for dollars in spot and forwards market. The currency could weaken some more, benefiting companies with dollar revenues and rupee costs including technology and pharmaceuticals, Credit Suisse said. On the flip side, a weak rupee will hurt companies with dollar costs such as consumer staples, and those with unhedged dollar debt like Bharti Airtel Ltd.

While the Reserve Bank of India’s record $422 billion reserves will ensure the rupee doesn’t go into a tailspin, the widening of the trade gap to the most in 4 1/2 years and a slowdown in foreign direct investment are worrying points, according to the analysts.

“January 2018 did not see the expected seasonal decline in trade deficit," they said. “If that persists, current-account deficit would annualize at $90 billion — a level capital inflows may struggle to fund,” they wrote.